December 19, 2008

GM and Chrysler Get TARP Funds

The White House announced this morning that loans would be
made to General Motors and Chrysler under the terms of the bailout act’s
troubled asset relief program (the TARP). General Motors will receive $13.4
billion in three chunks ($4 billion on the loan closing date of December 29,
2008; $5.4 billion on January 16, 2009; and $4 billion on February 17th, 2009
(with the last payment described as being contingent on congressional action)).
Chrysler will receive a single payment of up to $4 billion on December 29,
2008. (The term sheets are here
and here.)

The loan contemplates the creation of a car czar—actually,
more woodenly, the “President’s Designee”—who will manage the two loans. GM and
Chrysler are required to submit restructuring plans by February 17, 2009 with
full plans ready to go by March 31, 2009.

The term sheet announces key restructuring targets. These
include a bond exchange to reduce public unsecured debt by two thirds. As to
labor contracts, Japanese parity is the order of the day. Average US employee
compensation is to match by December 31, 2009 average US compensation for
Toyota, Honda and Nissan; job-banking practices are to be ended and fired and
laid-off employees are to receive no more than customary—non-auto? Non-US
auto?—severance pay; and work rules are to be modified to again match those of
the three Japanese US manufacturers.

As to the big picture, three points. First, this should
remove the specter of an immediate bankruptcy filing—in 2008—by General Motors
or Chrysler. This will push these issues out for two months and into the hands
of the Obama administration and the new Congress. It was optimistic to think
that a restructuring deal could be cut on the timeline of last week and this
now creates a more realistic window. Second, the labor blueprint calls for
Japanese parity by the end of 2009 and that is much sooner than the UAW was
willing to agree to last week. The critical issue is whether the UAW will move
on that without a bankruptcy filing. Third, the term sheet says remarkably
little about the dealership network. There is a general call for
rationalization of workforce, suppliers and dealerships but there are no
restructuring targets or term sheet requirements by February 17, 2009 for
dealerships.

On to more technical matters. First, the GM loan is being
made to GM, not GMAC. There have been some speculation Treasury would act
through GMAC so as to make it harder for other industrial firms to seek funding
under the TARP. That wasn’t done. GMAC also might fit more naturally in the
definition of financial institution set forth in the bailout legislation, but as
I’ve suggested before (here
and here),
I think Treasury has sufficient flexibility to lend to GM and Treasury has gone
that route.

Second, the government has backed away from trying to take
loans senior to existing secured loans. An early version of the auto bailout
bill did that and that raised a variety of contractual and constitutional
problems (see my post here
on that). The term sheet calls for the government’s new loan to be secured and
first but only to the “extent legally and contractually permissible.”

Third, doing the loan through the TARP rather than through
the separate auto bailout legislation has constrained the government in setting
the loan terms. The December 10, 2008 version of the auto bailout bill created
a number of bankruptcy specific provisions for the government loan, including
that the loan (i) would not be dischargeable in bankruptcy; (ii) would be
exempt from the automatic stay; and (iii) would not be modifiable through a
plan of reorganization, absent government consent. The TARP loans won’t have
those protections and presumably will be subject to the ordinary rules of
bankruptcy, as the bailout out bill doesn’t give Treasure broad authority to
preempt the Bankruptcy Code.

There is one provision in the term sheet that seems to try
to get around that. The term sheet provides that after a bankruptcy filing by
GM or Chrysler, Treasury has the right to convert its facility into a
debtor-in-possession facility. I’m not sure what to make of that. Chrysler gets
all of its funds immediately on closing and GM will have received all of its
funds by February 17, 2009. I assume that the government expects that neither
of these firms will file for bankruptcy before that date. I don’t see how a
lender, the government or anyone else, unilaterally converts its prepetition loans
into debtor-in-possession loan status.

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The thing that seems odd to me is tying the money to parity with Japanese automakers. Isn't it likely true that Honda/Toyota were paying above market wages so as to compete with GM/Ford/Chrysler for skilled workers in this sector? Let's get rid of the UAW contracts all together and let the chips fall where they may.